Global oil prices fell from a 2008 peak of $147 a barrel to $27 in 2016 - Edexcel - A-Level Economics A - Question 8 - 2017 - Paper 2
Question 8
Global oil prices fell from a 2008 peak of $147 a barrel to $27 in 2016.
Evaluate the likely macroeconomic consequences of a significant fall in global oil prices.
Worked Solution & Example Answer:Global oil prices fell from a 2008 peak of $147 a barrel to $27 in 2016 - Edexcel - A-Level Economics A - Question 8 - 2017 - Paper 2
Step 1
An increase in overall economic activity (real GDP)
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Answer
The reduction in oil prices can lead to lower production costs for businesses that heavily rely on oil inputs. Consequently, this may lead to an increase in overall economic activity as firms benefit from reduced operational costs, potentially boosting real GDP by 0.1 to 0.5 percentage points.
Step 2
Impact on consumer spending
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Consumers are likely to see benefits through reduced prices for fuel and oil-related goods. With lowered costs, real household incomes may increase, which can enhance consumer spending and stimulate aggregate demand.
Step 3
Effects on the oil industry and related sectors
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The oil price decrease could lead to significant challenges for oil producers. Many companies may face bankruptcy due to unsustainable operating costs, resulting in job losses and reduced tax revenues in oil-dependent regions.
Step 4
Consequences for financial markets
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A significant fall in oil prices may lead to instability in financial markets as investors react to the potential collapse of oil companies. This uncertainty can introduce volatility, impacting global stock markets.
Step 5
Increased consumer confidence
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With lower fuel prices, consumers may experience increased disposable income, leading to higher spending in various sectors of the economy. This could foster enhanced economic growth.
Step 6
External debts and economic vulnerability
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Countries that rely heavily on oil exports, such as Russia and Venezuela, might experience increasing external debt issues. Lower oil revenues could create economic instability and impact government spending.
Step 7
Political and social implications
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Declining oil prices can lead to political instability in oil-dependent countries due to reduced government revenues. This can provoke unrest and difficulties in maintaining public services.
